Market Turbulence Subsides, But Concerns Linger
As the world breathes a sigh of relief following a series of encouraging inflation reports, the main event is yet to come. The highly anticipated U.S. consumer price report for December is due later today, and its impact will be felt across global markets.
Bond Markets Stabilize, But Caution Remains
The advance soundings from the U.S. producer price and British consumer price inflation reports have provided some comfort to debt markets. However, the details of the U.S. PPI were more mixed, and sticky components like air fares may still pose a challenge to the Federal Reserve’s favored PCE inflation gauge. As a result, bond yields have come off the boil, with 10-year Treasury yields ticking back about 5 basis points from 14-month highs above 4.8%.
Fed Futures and Dollar Index React
Fed futures are now comfortably pricing one more Fed rate cut this year, although they’re hesitant about two. This has pulled the dollar index back lower, providing some respite to currency markets.
UK Inflation Data Brings Relief
The less equivocal UK inflation data has seen 10-year gilts outperform, offering considerable relief to the government. The 30-year gilt yield has pulled back up to 10bps from the 27-year highs it set on Monday. Despite the implications for Bank of England easing, the pound has held its ground.
Banks Resist Mortgage Rate Hikes
Curiously, Britain’s banks have resisted upping mortgage rates despite the gilt jolt. Many are accepting smaller profit margins and bigger risks on UK mortgage lending, with their appetite to lend greater than worries about higher funding costs.
Stock Markets Take a Breather
The bond stabilization has given some solace to U.S. stock markets, which are starting to focus on the earnings season. The S&P500 edged higher on Tuesday, with the small cap Russell 2000 outperforming. European stocks were also higher, with inflation updates from France and Spain coming in on forecast.
ECB Officials Sound Cautious Note
The European Central Bank is likely to keep easing policy this year, but needs to be cautious due to exceptional uncertainty surrounding the outlook. Two of the bank’s top officials emphasized the need for caution, citing potential global trade wars and domestic politics as key risks.
Trump’s Inflationary Policies Loom
The potentially inflationary policies of U.S. President-elect Donald Trump’s incoming administration are also casting a shadow over bond markets. Trump’s inauguration is on January 20, and the confirmation hearing for his Treasury Secretary nominee Scott Bessent is due tomorrow.
Global Markets Wait with Bated Breath
As the world waits for the U.S. consumer price report, other key developments will provide more direction to markets later today. These include the Federal Reserve’s Beige Book of economic conditions, speeches from top Fed officials, and U.S. corporate earnings reports from major banks.
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